Upstart Might Someday Be One of the World’s Largest Lenders

Stock (Symbol)

Upstart (UPST)

Stock Price


Data is as of
August 15, 2021
Expected to Report
November 9
Company Description
Upstart Holdings, Inc. is a cloud-based artificial intelligence (AI) lending platform. The Company’s platform aggregates consumer demand for loans and connects it to its network of Upstart AI-enabled bank partners. The Company’s AI models are provided to bank partners within a consumer-facing cloud application that streamlines the end-to-end process of originating and servicing a loan. It has built a configurable, multi-tenant cloud application designed to integrate seamlessly into a bank’s existing technology systems. Its configurable platform allows each bank to define its own credit policy and determine the parameters of its lending program. The AI models use and analyze data from all of its bank partners. Consumers can discover Upstart-powered loans in one of two ways: either via Upstart.com or through a white-labeled product on its bank partners’ Websites. Source: Thomson Financial
Sharek’s Take
David SharekUpstart (UPST) continues to be one of the top stocks in the stock market. Two qtrs ago, the stock jumped from $60 to $165 in just THREE DAYS after the company reported profits that whooped analyst estimates. Last qtr the stock was down with the rest of the “speculative” stocks until it reported earnings once again that beat estimates, and the stock jumped from $84 to $141 on the news. This qtr, the stock jumped from $136 to $203 in the three days after the company reported profits. This stock isn’t being “hyped up”. Upstart is delivering real growth, and the company has the opportunity to blossom into one of the world’s largest and most impactful FinTechs.

The company offers a cloud based software package that allows banks to process and (perhaps) approve loans, then keep them or sell them. Upstart began as a personal lender, then decided to sell its technology to banks and credit unions to reduce risk by using AI to determine a borrower’s creditworthiness when doing personal loans. In March, management announced its acquiring Prodigy Software, a cloud-based automotive retail software developer. This makes for an easy expansion into auto loans, which the company began originating in September 2020. Overall, Upstart claims it saves borrowers $72 per month using its system. Here’s the process:

  • Upstart thinks FICO scores are outdated, and have developed AI models that target fee optimization, income fraud, prepayment prediction, identity fraud and default prediction. Its models incorporate 1000 variables with a dataset containing 10.5 million prepayment events.
  • Banks log into Upstart software that integrates into a bank’s existing technology to define its own credit policy of its lending program.
  • Loans issued through the platform can be retained by the originating bank, bought by Upstart itself, distributed to institutional investors and buyers that invest in Upstart-powered loans via whole loan purchases, purchases of pass-through certificates, and/or investments in asset backed securitizations.
  • In 2020, 21% of the company’s total loans were retained by the original bank and 77% were purchased by institutional investors, via Upstarts loan funding programs.
  • 67% of 2020’s loans were originated by Cross River Bank, which delivered 63% of Upstart’s total revenue.
  • Revenue is primarily comprised of fees paid by banks, such as referral fees for each loan referred through Upstart.com and originated by a bank partner, platform fees for each loan originated, and loan servicing fees.
  • Consumers on the platform are generally offered unsecured loans ranging from $1000 to $50,000 with APRs ranging from 6.5% to 35.99%, with terms from 3-7 years.
  • In last qtr, 71% of Upstart-powered loans were instantly approved with no document uploads, calls, and waiting and were fully automated.
  • The Consumer Financial Protection Bureau reported that a study by Upstart of its data showed its AI model approves 27% more borrowers than traditional lending models, with 16% lower average APR on its approved loans.

Upstart stock is red-hot, and for good reason. Profits are expected to climb from $0.23 last year to $1.08 this year. The stock also has one of the highest Estimated Long Term Growth Rates within the stocks we cover, 89%. But there is risk that this “new” AI method of processing loans might lead to higher charge-offs down the road. Fortunately for Upstart investors, 97% of revenue is fees from banks or servicing, so the company has little credit exposure. Also, more than 80% of revenue comes from 1-2 banks. Last quarter I called Upstart a speculative stock, but last qtr’s exceptional results today don’t just happen. This company is for real. As the CEO mentioned in the earnings call “Upstart has an opportunity to become one of the world’s largest and most impactful FinTechs in the years to come”. Upstart is part of the Aggressive Growth Portfolio. I doubled my position last week after the company reported earnings. I will now add UPST to the Growth Portfolio today. This company just went public last year, and used a traditional IPO instead of a Special Purpose Acquisition Company (SPAC).

One Year Chart
UPST surged from $135 to $205 last week. Also, two qtrs ago the stock surged from 59 to $125 the week it reported profits. During both weeks, there was HUGE VOLUME, which is a bullish sign.

The P/E of 188 is down from 202 last qtr, and 242 2QtrsAgo. UPST is in its infancy, so profits are just starting to come in, thus I am pricing the stock on a price-to-sales basis instead of the P/E anyway.

Earnings Table
Last qtr was UPST’s 3rd qtr reporting as a public company and it beat estimates of $0.25 by $0.37 and delivered a profit of $0.62. That was 789% qtrly profit growth. Also, revenue jumped 1018% and 97% of revenue came from servicing and bank fees. Bank partners originated 286,864 loans totaling $2.80 billion, up 1605% from the same quarter last year. Last qtr, the company did more than $1 billion in auto loans  through Prodigy as it doubled the number of dealers it does loans for on a year-over-year basis.

Annual Profit Estimates continue to climb. Especially this qtr, as 2021 estimates jumped from $0.62 to $1.08.

Qtrly profit Estimates are for 123%, 186%, 41% and -40% profit growth the next 4 qtrs. My guess is the company will continue to beat estimates. Note: Transaction volume dropped like a rock in the year ago period. So, let’s not get too excited about this qtrs growth. For example, during the past 6 qtrs, Transaction Volume has been:
2020 Q1: $1.1 billion
2020 Q2: $164 million (4QtrsAgo)
2020 Q3: $900 million
2020 Q4: $1.2 billion
2021 Q1: $1.7 billion
2021 Q2: $2.8 billion (LastQtr)

Fair Value
2021 revenue estimates have soared from $360 million to $725 million this year alone. That’s a big jump, and each qtr the company has reported earnings these numbers have climbed.

UPST currently sells for 22x 2021 revenue estimates of $725 million. My Fair Value is 25x revenue, which works out to the following:

22x $725 million = $15.9 billion market cap
$15.9 billion / 78 million shares = $203

2021 Fair Value:
25x $725 million = $18.1 billion market cap
$18.1 billion / 78 million shares = $232
Upside/Downside: +14%

2022 Fair Value:
25 x $992 million = $24.8 billion market cap
$24.8 billion / 78 million shares = $318
Upside/Downside: +56%

Bottom Line
Upstart (UPST) is one of the new “upstarts” in the stock market. The stock has been red-hot on two occations this year.

The Prodigy acquisition has gotten the the company firmly entrenched into the automobile loan market. Up next, home loans. And while Upstart evolves, the the Total Addressable Market (TAM) grows. The TAM for Personal loans is $84 billion, Auto & Personal loans are $635 billion, and U.S Consumer Credit (which includes Auto and Credit Cards) is $4.2 trillion.

Last week, UPST was moved up from 14th to 1st in the Aggressive Growth Portfolio Power Rankings. Today, the stock will be added to the Growth Portfolio today and will rank 16th in the Power Rankings.

Power Rankings
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16 of 38

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1 of 34

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